"Greece's national debt last year reached 113 percent of gross domestic product. The United States will hit that in about 2020, according to the Government Accountability Office, assuming policy continues as it has. And last year's U.S. budget deficit amounted to 9.9 percent of GDP, nearly rivaling Greece's 12.7 percent.
To pull Greece back from the edge, Papandreou has promised to cut the deficit to 3 percent of GDP by 2012. For the U.S. government to make an equivalent cut, it would have to shut down the Pentagon and a few other agencies: the departments of Agriculture, Commerce, Education, Health and Human Services, Energy, Homeland Security, Housing and Urban Development, the Interior, Justice, Labor, State, Transportation, the Treasury, and Veterans Affairs, plus the Environmental Protection Agency and NASA — and even then we'd come up a few dollars short. " Milbank
That is my favorite picture of the columnist. I do believe I have another of him as a jester. I appreciate people who do not take themselves too seriously.
Well, there is nothing funny about his economic prophecy. We have lived far too high on the hog. We are in the process of going broke and the great majority seem oblivious. The debt crisis is THE crisis. Unless we relieve the financial burden of public debt, the United States is going to become a miserable place to live in about ten years.
All those people who are fretting over the erosion of constitutional rights in this country are going to have a lot more pressing things to obsess over. Americans continue to live in a dreamworld in which they are entitled to the best of everything, security from violence, enough junk food to make them the fattest people in history and a Toyota in every driveway. I suppose they would rather have a Ford now.
Let's sober up folks. pl
I found a recent Bruce Bartlett column to be quite informative on this issue. It is at http://www.forbes.com/2010/03/04/consumer-debt-deficit-budget-opinions-columnists-bruce-bartlett.html
He goes into a bit of detail and addresses some myths/misconceptions.
I don’t think the majority of Americans are “oblivious” to “the debt crisis.” The painful recession most of us are enduring makes that an impossibility. Millions know they are “going broke” in stages.
If they seem apathetic, it’s because most IMO believe they are powerless to alter things. Here, from my perspective we are more like Russia in the 1990s than I care to admit.
There is an unholy alliance between the economic oligarchs (think Wall Street) and the governing class (our useless Congress and the Administration under Rahm Emmanuel and Larry Summers — and yes I am beginning to see Obama as a figurehead) that tolerates and even encourages the kind of economic scams that enrich both at the expense of the “majority.” For me the housing bubble is a perfect analog to many of the Russian stock frauds and banking scams that wiped people out there in the 1990s; and as in Russia during that economic meltdown don’t expect the Government to do a damn thing to help in any meaningful way (except to help Wall Street “preserve the system”).
As for erosion of constitutional rights, I disagree about its relative importance. It’s the one major distinguishing factor we have left, if we can keep it.
I think everyone should be aware of the history of this.
It took two hundred years plus for America’s debt to grow to to 1 trillion dollars…..
It grew to five times that under Reagan and Bush 1…. dropped under Clinton.
It then doubled again under Bush 2.
It is a matter of historical record that under the “Business friendly” regimes run by Republicans in the last fifty years or so, not only has the national debt risen by a factor of ten…… the growth rates for the economy slowed each time.
Congressman Ron Paul’s plan for a “Freedom President”:
Yes, and in that time frame I’ll be about 80 and people will want to listen to my opinions even less than now.
The big business lobby runs this country using our elected representatives as their pawns to enrich themselves and a narrow segment of the population.
Those people DO NOT care about anyone else or their long term effects.
Will we some day soon see a shift from politics as normal and see some constructive and effective changes made?
One can only hope I guess.
The Greek analogy is inapt, as Greece is part of a currency union. If the American debt situation worsens, the currency can simply be devalued.
This would help the trade balance, by increasing the price of imports, and cutting the price of exports.
Given the amount of US dollars held by the Chinese, it’s more likely they would be begging you in such a situation. If the dollar falls, their assets become much, much less valuable.
They’ve dug themselves into a hole with their policy of subsidising exports by keeping their currency low against the dollar (which requires buying dollars).
Dean Baker, an economist who was very prescient on the housing bubble, has more and similar things to say on Milbank’s column:
America does need to eventually figure out how to pay for the things it was government to do (ie. raise taxes), or decide to forego some government services. But it’s in a much better position than a country such as Greece.
Ross Perot made the federal debt the cornerstone of his presidential campaign in 1992. He got 19 percent of the popular vote. When the computer industry exploded in the middle of that decade, the federal coffers got filled back up, and by the time Clinton left office there was a federal surplus.
I realize the current debt is exponentially higher than ’92, but why can’t the same kind of economic upturn happen this time? Of course we also need financial system reforms that appear to be stalled in our pay-to-play Congress. But all the dire predictions about the federal debt sound just like Perot back in the post-Reagan years. There’s nothing new under the sun.
All the discussions in the U.S. when public debt is in question is always about cutting this or that.
That is stupid. What might ruin the U.S. is the “tax cuts are good” mentality.
The U.S. should tax all personal income, which would include income from capital gains, above $1,000,000 at 50%.
Income between $500,000 and $1,000,000 at 40%. And further down at 30%, 15% and 0%.
That would pay off the debt pretty fast. Add a decent gas tax and that would even allow a real universal healthcare.
I forgot to note that many countries have much higher debt loads than America does today, and seem to be doing alright. Japan’s debt is significantly higher than that of the United States (200% of GDP), but it’s not giving them any trouble at the moment.
Unless and until the ideas that have informed American fiscal policies for the majority of the past thirty years are permanently relegated to the dustbin of history we are doomed. This situation is primarily, but not entirely, the responsibility of the movement conservatives who have dominated the Republican Party since the 1970s. The Democratic Party, which was the primary advocate of the Keynesian philosophy that underlay the enormous surge in our prosperity that occurred in the middle third of the 20th century, has been complicit mainly by not defending and promoting those core values effectively in the Reagan and Bush eras in which almost all of the damage has been done. Their politicians were otherwise too busy trying to hang on to their offices and didn’t call bullshit when Republican administrations proved unwilling to take the heat for cutting popular programs, military and domestic, to offset the wealth-redistributing, high-end tax cuts that were the core tenets of their new-found religio-economic faith. The one GOP president who did try to be responsible learned a hard lesson in November of 1992.
Keynesian economics teaches that if budgets average slightly in the black in good times, over the long haul economic growth will ensure that the national debt will diminish relative to the gross domestic product even if significant deficits are incurred during recessions to spur recoveries. It is this ratio that is the key indicator of fiscal health and risk, not the absolute amount of the debt. Just as the Republicans learned in 1992 that their base would not tolerate deviation from the true “Taxes Are Bad” faith, the lesson the rest of the political class has taken from the Bush 43 years is “Why should we try to be fiscally responsible when 1) the Republicans will beat us over the head during the next campaign for raising taxes and 2) when they win they’ll just resume raiding the treasury again and drive us back into deep deficit?” Someone once said that “Taxes are the price of civilization.” Unless and until this meme overpowers the “Taxes are inherently evil” meme the right has been pitching the past forty years we will continue sliding down the slippery slope of the disintegration of our civilization.
In a word, no.
In a chart, still no. Britain sustained higher debt levels for the bulk of the last three hundred years.
In a paragraph, we do consume too much, but primarily health care. Excluding health care, the consumption share of GDP is lower now than it was in 1960, and Eisenhower-era consumption levels were hardly unsustainable.
Maybe we could start to get a handle on the problem by giving up on the idea of endless Asian land wars (something that used to be a big military no-no) and scrap our ridiculously bloated military-industrial complex.
The last point I’ll make for now is that America faces many more problems more serious than debt. Financial regulation, peak oil, etc. And they in turn could actually cause debt to increase, even if you become more responsible with your finances.
The cases of Spain and Ireland are instructive. Before the financial crisis, both of them ran fairly respectable budget surpluses.
But their economies were not based on solid foundations. Overheated housing sectors, and other things. When their economies fell apart, their budgets went from surplus to deficit overnight.
In America, the deficit, and debt, are more likely to be symptoms, rather than the problem themselves.
Charts of budget surplus/deficit for Spain and Ireland:
“Let’s sober up folks.”
abandon the Zionist sauce that spills our blood & consumes our treasure?
No Way, Jose. It cracks me up how so many of those crackpot Teabaggers say they really like Ron Paul or Pat Buchanan EXCEPT for their Foreign Policy views.
They are holding up weak Tea Bags without caffeine. DeCaff. Teabaggers with their Nuts cut off. The Celeron versions.
I find it incredible that with Milbank’s laundry list of agencies to be cut – cuts that he knows are politically infeasible or downright dangerous to the health and welfare of the nation – that he never mentions the inescapable and obvious, albeit politically humiliating (at least for the GOP) alternative that is actually going to end up being the only viable way out of our deficit mess; the raising of taxes, at least to the levels enjoyed under the patron saint of tax cutters, Ronald Reagan.
I find his outlook incredible. I do not find it surprising. Funny costumes aside, Milbank is a Villager through and through, and has subscribed wholeheartedly to the prevailing Norquistian wisdom that lowering taxes is always good, and that raising taxes, even in a time of crushing debt, is bad. A viewpoint shared by so many Americans that we never question the underlying assumptions behind it.
Until we cure this nation of the idea that paying for the services that we enjoy is evil, we will slide steadily downhill until Greece looks to us like America did to the Vietnamese refugees who came to my elementary school classroom 35 years ago – a place of impossible and incomprehensible wealth.
Mr. Milbank is a fear monger and to my knowledge has no particular background in economics. For example, there is no basis to project a straight line expansion of debt through 2020 as he does based on “current policy”. Nobody is proposing that.
The public doesn’t “get” Keynesian economics, so Obamanomics is going to be a hard sell, but there is a better explanation here:
With respect, the demographics are much worse. China and India have growing middle classes that are going to dwarf America within Ten years.
America currently consumes 60% of the worlds natural resources to support 200 million people in a Western lifestyle. We are heading towards a war for natural resources.
The competition for resources is now intense. Our biggest companies here expect an 80% rise in iron ore prices this year, and Chinese attempts to buy up Australian mining and agriculture companies are becoming a serious threat to national security.
The price escalation of oil and natural resources has the capacity to cause America financial pain in a lot less than Ten years in my opinion.
I’ll have something longer later, but I’d recommend the following:http://crookedtimber.org/2010/03/05/bookblogging-the-reanimation-of-trickle-down/
As well as most of the economics stuff at Professor Delong’s Blog and Professor Krugman’s Blog (for those that don’t like the latter’s politics, stick to his economics – he does a really good job making it accessible to non-economists).
You are right to be concerned about how the public debt should be managed.
Don’t overlook the massive private sector debt, from underwater mortgages to all the debt generated by “financial innovation.” Much of this private debt is being hidden at the Fed or by loose accounting.
I seriously don’t see how we can reduce the debt when one political party truly believes that reducing taxes is the answer to every problem. They may also believe in the Easter Bunny.
They need to quit signing Grover Norquist and the Club for Growth no tax pledges.
Personally, I’ve never minded paying taxes.
Good topic, but Milbank is hardly the right source to gather intelligence from, and “debt” is too broad a brush to use to fill in the details of our economic woes.
First, the term “debt” includes both pointless wastes of money (e.g., neocon wars of choice) and worthwhile investments (e.g., maintaining roads to get us safely to work and back). Just as a citizen might incur debt to buy a house or to throw a party, a government might spend wisely or not, and so it’s necessary to distinguish the utility of the debt before deciding if it’s a good idea or a bad one.
The current deficit figure mentioned in this article is also enlarged by some more honest accounting, by putting the cost of our wars in the budget instead of hiding them off the books. It’s not a coincidence that many of Bush’s most important backers included folks from Enron, and so it should be no surprise that our budgetary accounting took on a decidedly Enron-esque costs-go-off-the-books nature during the last administration.
And finally, note how the term “debt” is juxtaposed by “deficit” in Milbank’s article. We’re seeing a lot of this particular confusion of late in the press, and either Milbank understands the difference (in which case he’s not a very good financial journalist) or he doesn’t (in which case he has no business offering his views).
Like all comparisons of stocks and flows in economics, these two concepts are related by integral calculus (though simple addition will take one a long way towards understanding). But the debt is the problem here: the deficit is its rate of growth. And to first order, the size of the current debt is not a by-product of Obama administration actions: it’s a reflection of the warped priorities of nearly ten years of Bush administration decisions that revered (a) the utility of tax cuts for those who didn’t need the money, over (b) the value of job creation investments for those who did.
I’m hardly a fan of President Obama, but at least he’s done something to break that sense of malignant prioritization. He needs to do a whole lot more, but Milbank is hardly the person to remind us of this fact, since his jester outfit was deployed during an interview on MSNBC’s Countdown, where he was talking about Dick Cheney’s shotgun aiming skills, and not about the Bush administration’s skewed financial priorities.
that Japan has 200% of debt is not significant to the USA, for Japan has self-financed the debt, and Japan also holds almost $800 BILLION of USA treasuries and more of other currencies.
Tax raises will not ever get the USA out of hock, please observe the movie [30 min]:
With the data from Mr. Walker, the last Comptroller General of the USA, quit his post to EDUCATE USA CITIZENS on the fiscal mess the feds face without Afganistan surge.
As an aside, I read 100+ commentaries on the article, and it did not surprise me that so many were reflectoing some utopian dreams, rather than REALITY.
DOD and related will HAVE TO BE CUT GREATLY.
Rep Paul is right in many of his statements, but he errs in planning to defer to the Several States to run education. REALITY is against his proposition as results in comperative achievement in OECD lands ascertain.
Well, Col. Lang, I’m with you on this one and have been for a while now.
I turn back to what the CBO director said earlier this year:
Those who believe that our budgetary problems can be solved through tax increases should consider that the costs of government services are increasing faster than GDP. There is no level of taxation, therefore, that is sustainable over the long term. Also consider that to cover today’s government budget would require extraordinary levels of taxation – higher than many European countries – for a much lower level of services.
So-called conservatives, on the other hand, demand more tax cuts despite the fact that 40% of the population effectively pays little to no income tax and, as the Milbank and other articles make clear, spending cuts alone cannot work.
The point is the political establishment on both the right and left (and their tired narratives) cannot solve our fiscal problems. We need drastic entitlement reform as well as hard choices that will likely require significant reductions in government spending along with significant tax increases. In the current political environment such changes are unlikely anytime soon which means these problems won’t be substantively addressed until we are at the edge or well past the point of crisis. Just look at the comments in this thread thus far – most ignore the problem entirely in favor of blaming the political opposition or engaging in ad hominem against Milbank. That doesn’t bode well for the future.
Saloman: That Japan’s debt is self-financed doesn’t change much. The main risk of having foreigners own your debt is when your debt is denominated in a foreign currency as well. Japan has debt denominated in Yen, and American debt is in US dollars. As a last resort, they can print more of it. For that reason, both countries are insulated from the worst type of debt crisis faced by countries such as Argentina, which had foreign denominated debt.
In Argentina, a currency devaluation had the effect of increasing their debt load. America or Japan do not face this problem.
That foreigners do hold US debt is largely due to the current account deficit, not the budget deficit. China is buying US bonds in order to fix its exchange rate. They could accomplish the same goal by buying US stocks and real estate instead. If they did that, then less US debt would be held by foreigners. But its not clear to me how that would change anything.
The salient question is whether or not the debt is denominated in the national currency. And the way to decrease liabilities owing to foreigners is to reduce the current account deficit.
As for Mr. Walker and IOUSA….you’re not quite right about Mr. Walker’s reasons for quitting. Or at least, educating the American people was not the only reason.
He left the office of the comptroller general to become President and CEO of the Peter Peterson foundation. I’m certain he is none the worse financially. Peter Peterson also financed and distributed IOUSA.
This is an ad hominem argument, and thus not strictly valid. However, they can be persuasive. Who is Peter Peterson? He is a wealthy banker type, who has long held it his mission to convince the United States government to dismantle social security and medicare. The current crisis was caused by banks and the housing bubble. Mr. Peterson and his foundation have used it as an excuse to advocate the gutting of programs designed to serve the middle classes and the poor. Mr. Walker’s comments and IOUSA’s arguments should be viewed in light of the agenda they are financed to serve.
Printing money does not solve the problem to those whose debt is owned by foreigners [USA] for the simple reason that interest rates will go up, and the REAL VALUE of the currency will go down.
A very large % of USA Treasuries is held in short term paper [most under 5 year term] thus the BOND OWNERS can insist on higher interest RATES in short term – which would break the bank [as it were, remeber the 18% prime rate and its effect on USA/ Canada, et al a few years back].
Other aspect of debasement is the inflation [esp in oil, industrial; base metals, rare earth, agricultural products etc] which would cripple the non-existent GREEN SHOOTS OF USA; and force foreign owners of USA funds to go on a shopping spree for these goods [increasing the economic pain of USA] – observe the Sovereign Funds buying spree of mines, oil fileds, agricultural land etc as they price out USA ability to compete on prices.
Furhter, other actions might be taken by those hurt via various USA policies, such as barring Wall Street from dealing in National bonds [please see :
Whrein such measures hurt the USA economy, causing further deteriation of USA tax-base.
NO YOU CAN NOT PRINT MONEY WITHOUT PAYING THE PRICE [Weimar Republic, Hungary, Zimbabve, Argentina, etc — REMEBER HISTORY and take your clues from it!
When President Bush took office there was a budget surplus. There was also the California energy crisis, one that drove Governor Davis out of office and Schwarzenegger in. Remember the Dick Cheney energy policy task force? The membership and meeting minutes have yet to see the light of day. On top of that de-regulation, 5 major tax cuts and a $1tillion war have taken care of that budget surplus. I’m sure we can all repeat the slogan “9-11 changed everything’, but that does not make it true. If, as their ideology states, tax cuts stimulate economic growth and job creation then why isn’t Michigan the promised land, after all Governor Engler cut $4.3 billion out of state taxes when he left office?
From re-reading the prior piece on the Tea-partiers I’ve concluded that they are part of the ‘got mine, screw you’ generation. As long as they don’t see a line item fee they are happy to spend away on building Iraq, Afghanistan, etc. Their road, schools – you bet, some guys in some other state? Heck no!
If readers want some good primers on economics I would suggest these two blogs:
Colonel, I hope you don’t mind us continuing our little debate here.
N. M. Salamon:
I didn’t say printing money was a good idea. It’s a last resort, but one that was unavailable to Argentina or Weimar Germany. The main impact of having debt denominated in your currency is that your debt doesn’t increase if the dollar drops. This makes a BIG difference.
If US debt were denominated in Euros, you would have cause to be much more worried.
America has a current account deficit. As a result, foreigners buy US assets, including debt. Japan has a current account surplus, which means they buy foreign assets. That is why foreigners do not hold their debt.
If you’re concerned about foreign holding of US debt, then the solution is to decrease the current account deficit. The main way to do this is to reduce the value of the dollar. It is currently overvalued, propped up by Chinese purchasing of US treasuries.
Reducing the budget deficit would do precisely NOTHING to reduce foreign holding of US assets. Rather than debt, they would simply buy more of the mines, oil fields and other assets which you also appear to be concerned about.
Thus, if you’re concerned about foreign holding of US assets, then you should be worried about the current account, not the budget deficit.
You say debasement would cause foreign owners of US debt to shop instead for assets. This would mean less foreign ownership of debt (which you seem to advocate), and more ownership of private assets instead. That would be, as I said, a current account deficit problem.
Just to be clear, I do think that the US faces fiscal problems. Either government services must be cut, or taxes must be raised, eventually. If this isn’t addressed, it will cause a long run debt problem.
However, I don’t think the problem is as urgent as it is often portrayed. That is the basis for my comments.
Far more urgent, in my mind, would be reforming the banking system so that the government will not be on the hook again to rescue it from collapse. This past collapse added much debt, and any future crisis would do the same.
I think the thing to focus on with this is that we’re looking at three different problem sets. One is about process, specifically the broken process of how the Federal government, and many state and local governments, function, especially in regards to revenue related matters. The latter two deal with short versus long term deficits.
The first problem set, how government functions regarding finances and financing, is going to have to be fixed. And this isn’t merely a matter of one side always screams “tax cut!” and the other cowers and wets themselves. As several others have pointed out a great deal of this problem is either cutting taxes without offsetting spending or spending for things off budget or by deferring the payments to later. The biggest holes in the federal budget right now are the Afghan and Iraq military operations that have been funded off budget in supplementals, the hugely expensive Medicare Part D, and the fall off in revenue produced by an economy in terrible recession with an official unemployment rate of just over 10% and a real unemployment rate that might be closer to 20%. This dysfunction has been caused, as much more knowledgeable writers like Professor Delong, Professor Krugman, Dean Baker, Yves Smith, Bruce Bartlett, David Cay Johnson, and others have pointed out, by having our economic policies based on what is, essentially, a faith based economics, that had little empirical validity to begin with and has now over the past two years been shown to be completely inaccurate. Another element to this problem is that we’ve largely divorced our economics issues from our political ones. As a result no one runs for office boasting on how they’ll make our roads and bridges safer and improve our schools, rather they run on platforms of attracting businesses, usually through public subsidization (abatements, easements, rebates, grants, loans, etc). The first two things that should have been done as economic stimulus was that every state should have been backstopped in terms of budgetary matters for law enforcement, emergency services (fire department, EMTs, etc), health and human services (public health, etc), education, and recreation; this would have prevented massive furloughs, layoffs, and shutdowns of essential services. The second thing that should have been done is that the yearly infrastructure report card that the American Society of Civil Engineers releases every year should have been adopted as the to do list. The ASCE determined it would take $2.2 trillion dollars to get the US up to, and somewhat ahead of 2009 codes and specs – just imagine the positive economic ripples of putting American construction workers, manufacturers, etc back to work rebuilding our infrastructure so it that it isn’t still to 1950s code, combined with making sure that states and localities aren’t gutting their essential services as well as the people that work in them and depend on them. Both of those would have made serious impacts on reversing the recession while at the same time led to increased revenues from sales and income taxes. Remember if the money is fungible and can be turned into everything arguments is true for tax cuts for the wealthiest, then money must still be fungible and can be turned into any good or service when its in the hands of ordinary Americans. Sadly, neither of these things was done, or even seriously considered, not because they aren’t good ideas, but because the process is broken. Neither of these is a tax cut, which means that Republican legislators, leaders, and opinion makers would reflexively oppose it. And because it requires bold and decisive actions most Democratic legislators, leaders, and opinion makers wouldn’t even consider proposing it because the Republicans would say mean things to them! It is the same reason that we aren’t going to get any meaningful regulations or corrections to prevent the massive financial sector frauds that nearly destroyed the global economy from happening again. The result is the broken system we have today.
The second and third items are related: short versus long term deficits. Long term deficits, of ten years out and longer, are a potentially serious problem. However, they are manageable if the economy can be fixed and made functional. One of the biggest budgetary holes is the massive fall off in tax revenue that comes with high unemployment. If the unemployment trends can be reversed, then that short fall will be corrected. Similarly, if we could effectively wind down the military operations in Afghanistan and Iraq, that would take a huge, and almost completely unfunded (as in left for someone else to pay for), drain on the budget away. Personally I’m amazed the Chinese didn’t make us paint Beijing 2008 logos on our tanks and choppers! I could envision the Division patch: the normal 82 Airborne Circle/Square Patch with “brought to you by the 2008 Beijing Olympic Games” underneath it. A final, and radical perhaps, thought for dealing with long term deficits is to make some serious rightsizing in the US Defense budget. Now I’m all for the DoD budget, as its basically payed my salary for the past two years or so, but it is out of proportion to the rest of the budget. And I know that a lot of jobs are dependent on DoD projects, programs, etc, but just getting cost over runs under control, as well as proper oversight of all those contracts that we’ve all read about in Iraq and Afghanistan where work wasn’t performed, or we as tax payers were all triple charged, or where substandard work was done and no one thought to stop payment, would save a pretty penny. Unfortunately, and largely because of the broken process I mentioned above, the US Defense Budget is sacred!
The final problem set is short term deficits. This is really, as many of the other commentators have explained, not a big problem. When you can’t lower interest rates any lower, and the private sector has severely contracted, that leaves, in Keynesian fashion, the government as the purchaser and employer of last resort. What our real problem is that the new amounts added to our deficit based on the stimulus have actually been too low. That was for political reasons: 40% had to be tax cuts to get a few Republican votes, then the over all number had to be kept under $900 billion to keep a couple of those Republican votes and not loose a handful of Democratic ones. The stimulus was a chance to keep the US economy, and more importantly all of us who are part of it, afloat for the several years it is going to take to get it up and running again. Having to short ourselves because of the dysfunctional political process means that it will take far longer and be far more expensive to fix our economics problems.
Finally, and perhaps most important to keep in mind, is that the simple truth is that almost no household in America, let alone business, balances their books out every single month. We have car payments, mortgages, student loans, etc. At the business level we have revolving lines of credit, as well as other “deficit” spending that is often used to allow modern economies to function. So claiming that the government should have to operate like American families and businesses, without any deficits, is false – even if it makes a great soundbite!
Link to article by Economist James K. Galbraith on why public debt is good and why we need more not less in order to recover.
I agree with Adam Silverman.
Looking at the federal government, we have run deficits for longer than I’ve been alive. Since 1961 the federal government has run a deficit every year with the exception of five years – 1969 and 1998-2001. If we subtract the social security surpluses that Congress transfers to the general fund each year (while writing IOU’s to social security) that would result in only two years without deficit spending. If we factor out the spike in revenue from the tech bubble in 1999 then we are left with 1969 as the only year out of the past 49 where we’ve run an honest balanced budget. Future challenges will make a balanced budget much harder and we are virtually guaranteed 500-800 billion annual deficits for the next decade. How much longer do you think this house of cards can stand?
Consider that the CBO projects in ten years we’ll be spending approximately today’s defense budget (including supplementals for the wars, around $800 billion total) just on servicing the national debt. This is under a “best-case” scenario where the Bush and Obama tax cuts are repealed and the AMT hole is not fixed. It’s much more likely that interest on the debt in 2020 will be closer to a trillion annually which will make it the third most expensive budget item only behind medicare and social security.
If that doesn’t sober our nation up I’m not sure what will.
Despite frequent budget deficits, the US debt to GDP ratio fell during most of the post-war years. The only exceptions were the Reagan years, both of the Bush presidencies, and the very start of the Clinton presidency.
If the debt grows slower than GDP does, then you can run a small budget deficit while lowering your debt burden.
To make myself clear, I do think the government should try and balance the budget once the economy improves. And, it’s possible we will never return to growth like we had in the post war years. But if that’s the case, then poverty is at least as big a problem as debt will be.
But your story of fiscal profligacy in the past just isn’t that scary. The debt burden fell most of the time in those years! It only rose when the government came under the control of those who believed tax cuts would raise revenue. It is this attitude which needs to be changed.
I don’t disagree that this is a frightening spectacle, but every economist I’ve seen, and every economic projection always has to balance the size of the deficit in terms of the overall economy. I’m not arguing that high levels of deficit spending are good for prolonged periods, rather I’m arguing that focused, appropriate government deficit spending is necessary when the private sector is in sharp decline or seized up. That is the case now. And please remember that the CBO estimates are based on conditions now, versus specific estimated conditions between now and 2020. Should the economy begin to function properly again, than those projections will change because the assumptions in the model will change. I would, again, direct you to Professor Delong’s blog where he has provided a number of very easily approachable explanations of how this all works and why it is necessary to run a larger deficit now if you really want a smaller one later.
As for deficits longer than you or I have been alive: I’m pretty sure we have some longstanding businesses and financial concerns in the US that have been using revolving credit that long or longer too. The point I was trying to make is that arguing that the government has to function like a family or a business in the way it handles its finances is a great sound bite, but it doesn’t reflect reality.
Oh, I forgot. The other reason that American debt to GDP fell in the post war years was inflation.
It is also universally acclaimed as one of the greatest periods of prosperity in American history.
N.M. Saloman, do you have an alternate explanation for changes in debt levels in the post war period, and inflation? It looks to me like a clear example of inflating away the debt which worked fine, in moderation.
How much longer do you think this house of cards can stand?
Until an alternative to the dollar as the world’s reserve currency can be developed. After that, it’s anybody’s guess. For what it’s worth, my guess is measured in nanoseconds.
It’s much more likely that interest on the debt in 2020 will be closer to a trillion annually which will make it the third most expensive budget item only behind medicare and social security
I would take issue with the word “expensive” in that characterization, because these budget items are thus ranked only by the their size as measured in dollars, and not by whether they are supported by net flows of income to the government or not.
Interest on the national debt represents a flow of money (often out of the country) in the present and the future due to borrowing for spending that was incurred in the past, where social security expenditures represent a flow from past surpluses and present revenues that generally accrues to those U.S. citizens who actually paid for those surpluses in the first place. So while their size as measured in dollars may be similar, their economic utility is not.
This is not to suggest that the national debt is not a problem (it is), or that the deficit doesn’t need to be trimmed (it does), or that various entitlements couldn’t stand improvement (they could, e.g., means-testing), or that both the legislative and executive branches of the U.S. government haven’t been involved in some awful combination of a Ponzi and a bust-out scheme (they have).
But we won’t fix the problems of the U.S. budget without due clarity in thinking, e.g., distinguishing an asset from a liability, or an investment from an expenditure. Lumping all these financial parameters into one container and then ranking them merely by gross dollar outlays sheds more heat than it does light, so we should do better in our efforts to illuminate this all-important subject.
And I thank you for your efforts towards such illumination.
Yes, inflation and good GDP growth meant than deficit spending was largely stable until the 1980’s. Your mileage may vary, but I don’t remember the 1970’s stagflation as a period of prosperity – at least where I lived.
Thanks for your comments. To be clear, my concern isn’t the present and near-term deficit spending. I agree we need to do what’s necessary to right the economy and large deficits can be a part of that assuming the money is spent wisely (And the ability of Congress to spend money wisely is questionable in my opinion). My concern is the path we’re on and the future. Since you bring up Brad Delong, here’s how he puts it:
The current health-care reform proposals don’t do much of anything to get spending under control and Congress is talking the talk on Paygo, but not walking the walk. Hence my cynicism.
And here’s Krugman back in 2003 when the fiscal picture wasn’t nearly so bad as it is today. Back then the deficit was 3% of GDP with a 10-year deficit projection of $1.8 trillion. Today we have deficits of 13% of GDP and a 10 year deficit projection of $15 trillion. Krugman today is sanguine about deficits despite the fact the outlook is much worse than in 2003.
I do recognize there is a difference between sustainable deficits and debt and unsustainable deficits and debt. We certainly can run deficits, potentially forever, if they can be absorbed by GDP growth. But we are not in that situation. Regardless, the theoretical ability to sustain deficits in perpetuity does not mean it is wise to do so considering the negative effects (higher future interest rates, reduced domestic investment and saving, reduced future productivity, etc.). In other words, minimally sustainable deficit spending should be a waypoint on the road to minimal or no deficit spending. In my opinion, deficit spending is a tool that should be kept locked way until it is needed to deal with a urgent needs caused by a crisis (ie. recession, depression, war, acts of God, etc.).
Regardless, what concerns me most is the future, particularly the almost $70 trillion in unfunded liabilities this country faces in the coming decades.
First of all, thanks for your response – you make some good points. Semantics and accounting aside, however, I personally think it is a problem when interest payments grow to become one of government’s largest liabilities. If this were a temporary condition, that’s one thing, but there’s little evidence to suggest that liability won’t continue to grow without significant revenue increases along with cuts to actual government functions.
And to be clear here, I’m not saying that we’re doomed to financial ruin no matter what we do. I’m saying that I don’t believe our people and our government will address this problem until it becomes a clear and present crisis, which it will be in my lifetime if trends continue.
I was pre-embryonic in the 70’s. I meant the post-war period before stagflation, which most people seem to agree was pretty prosperous.
I agree with Andy and the Col, most of the rest of the above comments I would charitably describe as economic nonsense. Or just rose colored glasses.
The true state of economic affairs has been extensively documented at websites like Naked Capitalism and hundreds of others I could link to. The MSM is just lying to your face every day.
Market Ticker Blog has been covering this exhaustively for years, today’s posts are representative. Karl there is a retired businessman who used to be a Republican, now he hates both Parties equally, as they fully deserve. “He’s just a shill for Big Math” they joke in the Forums there. He uses charts and tables directly from the Government and Fed to prove the absurd position the USA is in financially, and the picture is so ugly that the MSM would not touch it with a hundred foot pole, it’s too scary for public consumption.
I am sure some of you would call him delusional or worse, but the cold hard math does not lie. If you want to take your debate to the Forums there, you’ll find there has been very lengthy discussion of these issues for years, and so far Karl has not been successfully refuted on any of his major points, though many have tried and failed. I like the guy, don’t mind the occasional strong language. He is so right on so many levels.
I urge all readers to spend an hour reading at his Blog (if you can, it’s highly disturbing). But you will find the facts the MSM have gone to great lengths to conceal from the public.
“What The Lehman Report Proves: Financial Insolvency” is a typical post there. Read it and weep, the level of corruption in Washington and the Obama/Bush Administrations is breath-taking. This is fresh news, not reported in the MSM (of course).
If this condition of rampant corruption and looting of taxpayers is not corrected, there will be no economic ‘recovery’ for America, only more decline.
Got a Watch:
I’m not sure Yves Smith of Naked Capitalism is saying what you think she is saying. While she views debt as a long run problem, she advocates deficit spending in the short run to support the economy.
This post is a good example. To cut back on the deficit now would put us into a worse recession, she says:
She’s worried about the long run, as this post shows:
Despite that, she doesn’t think taxes should be raised now, or that spending should be curtailed.
America is in a very bad situation economically. In the short run, removing fiscal stimulus will weaken the economy. In the long run, debt is very problematic.
Unfortunately, there is no one solution to both of these problems. They pull in opposite directions. The solution is not as simple as suddenly rediscovering “fiscal responsibility”.
The sentiments expressed in many of the comments on this thread are remarkably similar to the opinions of several institutional investors I have spoken with recently. The credit crisis of 2008 is now a distant memory with the salve of a nice run up in securities prices.
What continues to amaze me is that the folks that drove the economic bus into the ditch with a DUI, not only get to keep their driving license but now get to drive a freight train at high speed. Additionally their failed theories get repackaged as solutions to the problems they created in the first place.
“Thought leaders” like Krugman were urging Greenspan to foment a housing bubble to replace the Nasdaq bubble in 2002. And now there is no federal fiscal deficit that is large enough for him as he cheerleads for more and more!
Bernanke who studied the 30s Depression and is now deemed the expert on that subject is on record in October 2005 stating that there is no housing bubble and in fact housing reflects “strong economic fundamentals”. And in 2007 he goes on to prognosticate that the problems in subprime mortgages were contained. As the arsonist fire chief he is lauded for coming to the crime scene with spigot wide open.
Now in the third reflation this decade – ZIRP, fiscal deficits nearly as large as receipts and unprecedented Federal Reserve debt monetization are now promoted as the panacea and accepted as such by politicians in both parties as well as by large swathes in the country. The mortgage market has effectively been nationalized and Fannie/Freddie have an unlimited taxpayer blank check. But that is not enough, Bernanke has already printed $1.5 trillion to artificially suppress mortgage rates. In February, federal government outlays were $320 billion while receipts were $108 billion – a deficit twice the size of receipts. In fiscal 2009, receipts were $2.1 trillion while outlays were $3.5 trillion – a deficit approaching 10% of GDP – closing in on Grecian levels. In the past decade debt has grown at 7.8 percent while nominal GDP has only grown at a 4.3 percent rate – in that 10 yr period overall debt outstanding increased by $27 trillion while nominal GDP increased by $5 trillion. The ratio of total debt to GDP has been increasing since the 50s and now is around 369 percent – the highest ratio on record. The poster child for the proponents of these faith-based ideas is Japan. 10 year JGBs still only yield 1.325 percent. Yet interest on government debt represents 35 percent of Japanese government outlays. The Government Pension Investment Fund the largest holder and buyer of JGBs now has on a net basis no ability to buy more government debt as they run down their “portfolio” to pay pension benefits. Japan’s debt rollover this year is 45 percent of their GDP. Just as we saw in 2008 – Bear Stearns was “making money” on leveraged bets in mortgage backed securities until one fine day they could not rollover their debt at any yield. Credit markets run on psychology – when there is a turn – highly leveraged markets can face a discontinuity. Sovereign credit could face such a discontinuity if confidence erodes. Then there is only the printing press for those with debts in their own fiat currency!
In a thread labeled Scenarios in early December 2008 I wrote that “Today at the depths of our debt deflation I am struck by how pessimistic many are in contrast to how optimistic they were 3 years ago. The financial markets have already wrung out much excess.” Yes, that was a good time to take on additional investment risk in retrospect.
I also noted in that post “I am afraid however just as we have seen before this decade that we have already planted the seeds of our next economic crisis. There is universal acceptance that any deflation and economic downturn should be met with massive government intervention of easy money and deficit spending as well as bailouts of the well connected. The downside of every credit expansion should be met with even more debt. I believe this is the road for impoverishment of the American people.” I continue to believe that these reflationary policies that have proven to create discontinuities will substantially erode the standard of living of the American middle class. I worry when the people realize they have been robbed by our political and financial elites that they may become susceptible to demagogues even though Pat, you point out that “Americans lack the talent for “dressing up” that people in Europe had in the ’20s and ’30s”.
Krugman was being sardonic. He viewed prospects for the economy as grim, and couldn’t see any way out of the recession, except perhaps something foolish, like inflating a new bubble in housing.
It was tongue in cheek analysis, not advocacy. Krugman was actually fairly early in warning about a housing bubble.
Here is an article written two weeks after the one you linked to, doing just that. It was based on the work of Dean Baker, the economist I linked to earlier.
Graeme – You see firmly wedded to Keynesian Klaptrap. Referring to Krugman, sorry, I don’t think he has anything valid to say about it. He is part of the problem, and his delusional ‘solutions’ amount to more of the same failure. I’ve read far too many of his articles that I thought were complete nonsense to give him any deference. He’s an idiot, to put it simply. Nobel Prize, phffft.
Yves at ‘Naked Capitalism’ (I read it daily) has always been in favor of the ‘Swedish model’ right from the start of this crisis, and that is the correct path that should have been taken.
Under that resolution model, the Government would temporarily seize insolvent Banks, fire the Directors and management, Bondholders and shareholders are wiped out. Assets are sold off, and the insolvent Bank ceases to exist. Using that model, Sweden was able to resuscitate their Banking system and economy within 2-3 years.
That is the same amount of time the US has wasted on bailing out zombie Banks, extend and pretend, and saving Bankster bonuses for cronies on Wall St. And so is about 1 inch along the long road to real recovery.
As an Austrian School follower I would have bailed out none (zero) of the ones who got bailed out by your ideological compadres. Whether Bank or auto company or anything else.
I have concluded you and people who think like you are enablers of this crisis, and completely unable to see the real solutions. Keynesianism/Friedmanite followers are the delusional idiots who have led the US off the cliff, and by definition of their beliefs, cannot be part of the solution, as their bleiefs are founded on economic nonsense and wishful thinking.
“In the short run, removing fiscal stimulus will weaken the economy”<---- this statement is nonsensical. Government spending may be counted in GDP, but it is NO part of real wealth generation. As Government grows in size, the real productive economy shrinks. The fundamental structural mis-alignment of the US economy to 'FIRE' industries and 'service' sectors instead of productive valued-added wealth generation is a huge part of the problem. Increasing Government spending is no part of the solution. The solution is to cut the Budget, just like Greece is doing, so that some pain is endured in the near term but the economy emerges much healthier and more competitive down the road. And raise taxes at all levels. There is no other way out. An 'Age of Austerity' is upon you, the spending wall has been hit. There is no more money, rendering ideological positions irrelevant. 'Stimulus' spending is just more crack for addicts. Might as well burn the money in a fire, at least you get some heat. The Japan experience shows you what happens after year on year (20) of 'stimulus' - nothing but a bigger mountain of debt is apparent and the economy is still dead. The economic principles you find compelling I find delusional and totally unworkable in the real world. People who think like you are responsible for this crisis. I reject every argument you have made in this thread. Sorry.
I favour the swedish model as well. I don’t think we disagree on that point.
The alternative approach, of no strings bailouts and subsidies, has been disastrous. I think the banking sector should be massively shrunk. I’m Canadian, and quite happy that we’ve got a functional banking system up here.
But Yves Smith does favour stimulus. You didn’t disagree with this point, you just ignored it.
Here’s another quote:
” Fiscal stimulus is a band-aid. We need – now and for the next two years –massive government spending to support the unemployed and prevent the implosion of state and local governments. Beyond that, spending will not stimulate anything, and it has nothing to do with the causes of the crisis or with putting an end to it. It is the strong pain killer that the economy needs for the infection that afflicts it, but it is just a pain killer, not a cure. ”
I agree with that. It’s not a panacea, and its only a short term alleviative measure. In the long run, lots more problems need to be fixed. I’m not optimistic they will be.
But in the short run, it’s not clear to me why cutting essential state services will help the economy.
I take it you disagree with Yves Smith on this point?
(we probably agree on more things than you think. However, since we disagree on the particular issue of keynesian stimulus and debt loads, our differences in this discussion appear greater)
* I just realised I made an error and linked a naked capitalism post not written by Yves Smith in support of my argument in my previous post. This one was actually written by her.
Time to borrow some lessons and measures from past successes. Col. Lang is absolutely right about the debt being the biggie. Do like FDR: Go back, immediately to Glass Steagall, and ban purely speculative instruments like derivatives. They are unconstitutional means of creating national debt, most and most often, the transactions take place offshore. Wipe out trillions of dollars in fake debt, and resume issuing credit for job creating productive investment, starting with infrastructure, like nuclear power, highspeed rail, water management, etc. Internationally, do the same thing, by returning, by treaty, to fixed exchange rates, which further wipe out any justification for derivatives and hedging.
After reading the Millbank article and then reading all the comments I find myself feeling as helpless to understand the deep and ultimate causes of our debt as I suspect other layfolk might feel. I again note that the adherents of different economic schools hold interpretations deeply opposed to eachother. These interpretations are based on the opposing theories and ideologies of the different schools; and all the schools have equally credentialed, Nobeled, etc. economists. So I am reduced to almost an intuitive choice of which
economists “feel right” and “make sense” to me.
It might be a good rule of thumb to take seriously those economists who have made specific predictions about the major outcomes of major trends IF their predictions have come true. Dean Baker, Nouriel Roubini, and no doubt many others I don’t know about have earned respect with true predictions.
Got A Watch, I understood
Keynes himself to suggest a two-masked approach: smiley faced and frownie faced. We all know smiley faced Keynesian government deficit
spending to re-employ the jobless workers and workless factories and get people getting and spending to and from eachother again.
The frownie-faced side of Keynes’s approach was to reduce government spending below government tax receipts when employment was full and private spending was high, and eventually get government debt to zero to provide room
for another cycle of deficit spending if needed? Am I wrong about that? If I am right, is it really Keynes’s fault if his eager little heirs and descendants
only wanted to apply smiley side deficits?
I agree with people upthread on several proximate causes of this particular debt overhang. Movement Republicans (Norquistians) during Reagan and again during Bush II raised spending and lowered taxes to deliberately on purpose engineer debt so huge that a repayment crisis would be created. They planned to use that crisis to create an irresistable pressure to reduce or abolish social security and medicare/medicaid, even though those programs did not cause the carefully engineered debt crisis.
I remember a so-called Social Security “future crisis” being hyped during the late 70’s and early 80’s. The accusation was that the greedy baby boomer generation was going to expect Social Security in return for the Social Security taxes they were going to spend their whole working life paying. (The nerve of those boomers). The answer was decreed to be
raising Social Security taxes even higher so that the boomers would “pre-fund” their Social Security expenses when they retired. I began paying that higher rate about as soon as I started working. I (and we all) were led to believe that our FICA tax prepayments were being kept somewhere somehow safe for us to spend back down when we got old. The so-called “surplus” which the Clinton Administration took credit for was our Social Security pre-payment money, deceitfully counted as part of the General Budget to fake the appearance of surplus. It was our Social Security money which was given away to the upper class beneficiaries of Bush II’s high-end tax cuts. So I resent and reject in the bitterest possible terms advice from Mr. Millbank that “entitlements” should be “drastically cut” when Mr. Millbank knows very well that those “entitlements”, especially Social Security, are earned benefits which we have been pre-paying for in advance with our FICA taxes. We did not expect the governators in authority to mislable that money and then outright steal it the way they have done. Live and learn?
The solution would be to impose high enough taxes on “Bush’s Base” to claw back all of our Social Security money which was given to “Bush’s Base” as tax cuts instead of being set aside for those of us who spent decades so far paying it in the understanding that it was indeed being set aside for us-the-payers of that FICA money. It was our money. The fact that it was stolen from us through the subterfuge of tax cuts doesn’t make it any less our money today.
I agree with whoever upthread said that the proper approach to our failed megabanks would have been the Swedish approach. Imaginary money “lent” to financialist insiders today will have to be paid back with real money taxed from worked-for earnings tomorrow. And that is a part of our debt problem.
We will need to adopt a lower profile in the world and perhaps limit our military mission to the defense of America itself. The rest of the world is now
rich enough to raise its own armed forces and pay for them out of the rest of the world’s own earnings to meet threats to the rest of the world arising from somewhere within the rest of the world.
Walrus, the most straightforward way for America to address the resource overconsumption problem you mention would be for America to use less energy and less stuff. Easier said than done, I know. Perhaps this is our opportunity to learn how to pursue happiness through means other than getting and spending. America needs a cheaper dream.
Big Picture Blog John Mauldin
“The Federal Reserve and central banks in general are running a grand experiment on the economic body, without the benefit of anesthesia. They are testing the theories of Irving Fisher (representing the classical economists), John Keynes (the Keynesian school) Ludwig von Mises (the Austrian school), and Milton Friedman (the monetarist school). For the most part, the central banks are Keynesian, with a dollop of monetarist thrown in here and there.
Over the next few years, we will get to see who is right about debt and stimulus, the velocity of money, and other arcane topics, as we come to the End Game of the Debt Super Cycle, the decades-long cycle during which debt has grown. I have very smart friends who argue that the cycle is nowhere near an end, as governments are clearly increasing debt. My rejoinder is that it is nearing an end, and we need to think hard about what that end will look like. It will not be pretty for a period of time.”
John Mauldin is a pretty level headed analyst, who always used to end his weekly letter with a “but we’ll muddle through”. In the last year I notice he has become much more gloomy, as he explores the depth of this ‘Great Financial Crisis’ down to the bottom of the rabbit hole.
For the last few decades we have had the philosphical followers of Keynes “running” things, and I would submit they have run most of the global economy right into the ground. Academics can debate if those flawed followers of Keynes and Friedman straying from the path written by their patron saints is a cause or a symptom. At this point it matters not at all, those philosophies have failed completely, as they have been practiced.
Yves Smith may be mildly supportive of temporary stimulus, but that is in the context of a real reform of financial corruption and use of the ‘Swedish solution’, which places her almost totally ideologically opposed to Wall St and it’s champions.
I cite her Blog because every day she chronicles the total epidemic of systemic corruption that is the Wall St/Washington real ‘Axis of Evil’.
For solutions, I would prefer Karl at Market Ticker, I noticed you did not touch that one. Probably a good thing, as you would be torn to shreds at ‘Market Ticker Forum’ just like so many others who have tried and failed to refute Karl’s “Big Math”.
The Math does not lie, and it is saying that the USA is impacting the debt wall as we speak. With Obama’s total inability to rein in spending, next year the problem will be worse, and the year after…
If things are not changed, I would estimate there are about 2 years left before it all collapses in a Greek tragedy. The point of no return may have been passed already. There can be no real recovery as long as looters remain in charge.
The fact is the global financial network is actually weaker than it was in Aug ’07 when it all started to collapse. The chances of systemic meltdown are higher now than ever before. Every major Bank in the US and Europe is so wildly insolvent they should have been shut down years ago. The level of corruption is beyond epidemic, see the report on Lehman’s failure released last week.
The Government is just “Extending & Pretending”, hoping for a recovery to return the world to 2006. There has been none of the necessary reform. The actual end of this GFC is no where in sight, and until they stop lying about it with every breath, it cannot end.
Obama’s administration has been one of the most Wall St friendly in US history, his speechifying not withstanding. Talks a lot, does nothing, hands out favors to Banksters – pretty much like Bush, but even worse. With idiot Bankster scum like Larry Summers and Tim Geithner etc in place to ensure their cronies are favored at all costs, who could expect anything else?
Clinton repealed Glass-Steagall, GWB carried on with more of the same policies – both Parties in Washington are equally responsible for this crisis – just partners in looting the taxpayer.
The most egregious thing in all this is that in Washington there is no recognition of these issues, beyond a few rebel Congressmen and Ron Paul, under Obama’s “Plan” (for national suicide) America will still be running a Trillion $ deficit by 2020. The farce won’t last that long.
Individual Americans can bear responsibility too, they voted for the corrupt scum of both Parties who went to Washington to enable the Banksters looting.
The solutions are actually easy, though politically unpalatable – massive Budget cuts, tax hikes, austerity programs for a decade or more, reduction of Government size and scope. Its’ been done many times before. All else seeks only to avoid the inevitable in favor of short term gain, and pain (for someone else) down the road.
A best case scenario for the USA is 2 lost decades like Japan since 1990. All other outcomes are much worse.
Krugman may have been sardonic in that article however he, McCulley, Greenspan, Bernanke, Mishkin and most of the economic and political “intellegentsia” have been consistent advocates of enabling Wall Street asset inflation and massive central bank and government intervention to reflate asset markets whenever they hit an air pocket. Y2K, LTCM, Asian, Mexican and Russian debt crisis, TMT bubble, mortgage and private sector credit bubble are some of the examples of this worldview. The growing financialization of most western economies were based on these theories that shuffling paper with rent extraction could substitute for innovation and production in the real economy. It shows their depth of influence that even as the arsonists they are feted for arriving at the crime scene with the liquidity gusher! And it also shows that the American people are smoking strong stuff since even recent experience let alone the experience of the past decade is forgotten and the perpetrators of economic crimes are rewarded with even more power.
We can debate here the right course but the reality of an investment posture is dependent on what the financial and political elites who continue to hold power irrespective of party affiliation do. I am willing to bet that they will continue with their failed reflationary policies which would lead to the next funding crisis. That they will continue to monetize debt until their printing press is taken away. That the American middle class will ultimately pay for this chicanery with a substantially lower standard of living. We can only pray to Providence that they don’t get a taste for “dressing up” when that reality hits home.
Got A Watch
A point that the Austrian economists have consistently made is that in a monetary regime with no anchor, credit inflation inevitably gets out of control and always lead to busts. Ever since the 70s with a completely fiat dollar reserve currency we have seen the acceleration in credit market debt – now hitting a record 369 percent of GDP. Krugman in his critique of macroeconomics conveniently does not discuss the role of easy money and credit inflation which the Austrians believe have played a critical role in creating financial instability.
Zanzibar, a website called Prudent Bear hosts various economics writers, among them an economic analyst named Doug Noland. Doug Noland has for several years been writing a column called Credit Bubble Bulletin. He has been studying the various shadow-banking-system emitters of credit; the Fed’s desperately accomodative struggle to keep up, the pouring of credit-treated-as-money poured into asset class after asset class. To the best of my limited ability to understand what Doug Noland is writing, I think his columns might be useful. (Prudent Bear no longer maintains its archives. The Prudent Bear archives can be found at The Wayback Machine website archive project).
When you refer to investment posture; do you mean the investment posture one would wish society-in-general would adopt? Or do you refer to the defensive posture that individuals or families might adopt to evade or avoid the worst of the ongoing game of Grand Theft Finance we find ourselves trapped in?
I meant portfolio composition for both institutional and retail investors.
A point I made in my earlier comments on this thread is that the reflationists use Japan as their example and state if only they were more aggressive. What they miss in my opinion is that Japan did not get their bank’s to write down impaired assets in the belief that with loose fiscal and monetary policies they could reflate impaired assets and through positive interest spreads enable banks to earn their way through the hole in their balance sheet.
Fast forward 20 years – Japanese nominal GDP has basically stagnated but their total credit market debt has grown from 387 percent of GDP when their credit bubble burst in 1989 to now 530 percent. Even with a weighted average rate of 150 basis points, interest expense is 35 percent of government outlays. With a an aging and declining population there is going to be less and less domestic savings available to finance the government deficits. Its quite conceivable that Japan has passed the point of no return and the BoJ will have to go nuclear. And they are the second largest economy in the world!
We don’t want that fate here but unfortunately our political and financial elite believe they can scale-up their failed policies and get good outcomes.
Engineered by the same financial group involved in provoking the US supprime mortgage crisis, chances stand that the Greek debt crisis has a big potential to destabilize the EU but also to kick back to the US economy as well … The world economies and finances are so interconnected within the global economy, that it became literally impossible for a financial shock like the one in Greece to remain without consequences for the other (remote) countries as well … Stay tuned for what will happen next, and how EU will decide to go about it – the issue might reveal some interesting aspects and connections